In forex, the term "pip" is an acronym that stands for "percentage in point." Pips represent the smallest increments of currency pricing and are key to the establishment of bid/ask spreads. For the active forex trader, pips play an important role in both risk and trade management.
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Exchange rate fluctuations are typically quantified in pips, making them the de facto measurement of profit and loss for currency traders. Accordingly, the value of each pip is critical to the financial impact of trading activity upon the forex account. Trade size, or applied leverage1, is the primary driver of pip value―as leverage is increased, pip value grows.
Most software platforms furnish traders with unique features designed to monitor pip value. However, utilising the functionality of a Pip Calculator is an ideal way of understanding how applied leverage and exchange rates impact risk exposure on a trade-by-trade basis.
The Pip Calculator: Form And Function
Determining the pip value for a given trade isn't all that difficult, as it is essentially an exercise in basic arithmetic. However, executing these calculations manually can be a challenge in the live market atmosphere. With everything from platform maintenance to technical analysis on the active trader's mind, it can be inconvenient to take time out to derive pip value. Fortunately, the Pip Calculator makes the task routine.
Using the forex Pip Calculator is a straightforward process. Simply define the following trade-related elements as the situation dictates, then input the values directly into the Pip Calculator as prompted:
- Currency Pair: A wide variety of forex pairings are available, including majors, minors, exotics and crosses.
- Price: The market entry price for the selected pair is required.
- Account Currency: The base currency of the trading account is necessary for conversion purposes.
- Trade Size: Assumed leverage, typically in units or lots, is a key component of pip value. As the number of units is increased on a given trade, the value of each pip grows, as does risk and reward.
- Current Exchange Rate: The current exchange between the trading account denomination and counter currency of the traded pairing is necessary for conversion purposes.
The following example illustrates the functionality of the Pip Calculator. It examines two trades relative to a forex account denominated in GBP facing the GBP/USD and EUR/JPY:
A pip value for the EUR/JPY position is obtained by adding the currency exchange to the calculation. This function is performed automatically and made available in a spreadsheet format:
|Currency Exchange (GBP/JPY)||142.58|
The process of calculating pip value manually is not overly complex. Nonetheless, it is nuanced and may involve several currency conversions before completed. This is an area where the Pip Calculator is especially valuable. It quickly determines pip values for trades pertaining to any currency pairing for any account denomination.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…